Foot of the mountain

FY22 RESULT

Need To Know

• FY22 EBITDA US$11,234m, -7.5% below consensus, net profit a -6% miss
• Downgrades likely on operational issues, new depreciation policy, and lower gas prices 
• Final dividend US144cps (full year US253cps), payout ratio 80%

Woodside Energy’s impressive 2022 result is history. As the benchmark gas prices have fallen and operational issues are building, earnings downgrades are likely to temper the share price performance. Financially, the company is in a great place, but it has some very large projects to nurse through to completion at a time when global demand for energy is easing.

Result. Given the acquisition of BHP Petroleum mid-year, comparisons with the prior year are not meaningful. However, the actual outcome was numerically impressive with operating cash flow of US$8.8bn and capex of US$4.0bn enabling the Board to declare and pay dividends totalling US$4.8bn for the year.

At the end of the period, WDS’s gearing was 1.6%, but adding in the final dividend takes this measure straight to 9%. This is just short of the company’s target 10-20% gearing range and indicates the pressure is rising on free cashflow as the big capex program rolls out.

Unit production costs ($/boe) jumped to US$8.10 from US$5.30 in the previous year. This was due to higher maintenance costs in the year and the cost of the Pluto-KGP Interconnector.

Capex guidance is US$6.0-6.5bn for FY23 with about half of it allocated to Scarborough and Pluto Train 2.

Production guidance is unchanged at 180-190 MMboe comprised mostly of LNG (83-85), Pipeline Gas (40-42), Oil and Condensate (50-55) and NGL (7-8). The guidance allows for some major turnaround activity during the year.

The new depreciation policy will push this cost to US$4.4bn in FY23.

Regulatory. WDS made a thinly veiled criticism of State and Federal policy-meddling in the East Coast gas markets by asking for a stable policy environment aimed at increasing supply. 

Investment View

The thesis for WDS is for falling commodity prices that will reduce earnings and  operating cash flow just as the major projects are getting into the heaviest part of the build. Free cash flow will therefore fall and although the Board will stick to the upper end of its 50-80% payout ratio, dividends will be smaller. Gearing, already at 9%, may become a concern as the big development projects lumber on.

There is a perception that WDS is flush with cash, but this will be tested in the next year and beyond. It will depend heavily on the direction of commodity prices and demand as well as WDS’s ability to keep operating costs under control. Additionally, the company will need to ensure the big capex projects do not overrun budget – something that will be very unusual in the history of Australian LNG project development.

Trion is edging closer to FID (final investment decision) in the Gulf of Mexico and this project also warrants close attention. Located in Mexican deep water of the GoM, first oil from Trion is timed for 2028.

WDS has multiple other projects, both sanctioned and potential, that will keep it busy for several years. But it will take excellent management and execution skill to ensure shareholders get to benefit.

Figure 1: FY22 RESULT

Figure 2: FY22 NET PROFIT FACTORS